SURGUTNEFTGAS AND BP’S Bob Dudley

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In the short run, possibly for three quarters of this year, BP, run by chief executive Bob Dudley, will be short of its half-billion dollar quarterly cash dividend from TNK-BP. In the long run, whether Mikhail Fridman and his partners sell their 50% stake in TNK-BP to BP or to another Russian oil company, BP is on the skids, either out of Russia entirely, or remaining on terms that will give a Russian stakeholder new power over BP’s main shareholding – potentially the single largest stake in BP.

This is definitely not the understanding you would form if you read the Anglo-American press. The spoon-fed correspondent at the Financial Times quoted “one person close to the company” (BP) as claiming that the Russians had been “wrongfooted by BP’s decision to pursue a sale.” The Telegraph reports Dudley’s tactic is to “smoke out the troublesome oligarchs who are proving impossible to work with – to make them cooperate or sell their stake to a more compliant bedfellow.” The Wall Street Journal thinks Dudley is playing the card game of Mississippi Stud, in which “players have three opportunities to raise the stakes, or fold and walk away… Upping the ante a third time might be a winning strategy in poker. But in Russia they favor a different, and much more dangerous game of chance.”

Just how much cash Dudley will be unable to count on BP’s balance sheet for the time being is calculated here. BP cannot be expected to play much of a poker game if the stack of its chips on the table is already too small to wager.

On another card-playing point, the Anglo-American and Russian sources all agree – BP doesn’t have a government on its side of table: not the US, with which is at war with BP over the bill for the Gulf of Mexico oil spill; nor the UK, which is preoccupied with saving itself from its domestic enemies and for diversion is at war with the Euro zone and Bashar al-Assad.

So now that the game has been opened, what are the cards, and what are the rules of this game?

If the unsolicited expression of interest to buy BP’s stake in TNK-BP, which Dudley has announced, didn’t originate from Fridman and the Alfa Access Renova (AAR) partners, there is no evidence that it was from Rosneft, or Gazprom, or Igor Sechin, the controlling policymaker for the Russian energy sector. Rosneft could not have made the move without Sechin’s say-so, and Sechin says he didn’t initiate the move. Alexei Miller is categorical that his group, including Gazpromneft, didn’t make the move. If Dudley is telling the truth, he should beware of making Sechin appear to be a liar. And not for the first time. Sechin may have been angry at the way in which his plan for the Rosneft-BP alliance was destroyed in 2011, but he was not less furious at Dudley than at Fridman for the outcome. Indeed, Sechin ended up angrier at Dudley and does not consider him a reliable counterparty at the negotiating table. The latter ought to have heard about that by now, even if BP shareholders have not.

Supposing that a half-share in TNK-BP, either Fridman’s or Dudley’s, should be valued at up to $35 billion (counting the ancillary assets and a control premium), Rosneft doesn’t have the ready cash, the management strategy, or the will to borrow to be the buyer. Remember that the most Rosneft was prepared to offer BP in their ill-fated alliance on January 14, last year, was a swap of 9.5% of Rosneft shares for 5% of BP shares. At the time, the Rosneft stake was worth $7.8 billion, the BP stake £4.5 billion ($7.1 billion), and the combined value about $15 billion. Here’s BP’s calculation at deal announcement.

No deal can be done of any kind on the territory of Russia or with Russian assets between BP and a third party without compliance with the terms of BP’s joint venture and shareholder agreement with AAR, which commenced in 2003 at the formation of TNK-BP. The terms of that agreement have not been published. AAR’s claims that BP has violated the terms have been part of several threats of litigation, as well as pending lawsuits and arbitrations. The terms were upheld in the Stockholm Arbitration Tribunal ruling of April 8, 2011, which effectively killed Dudley’s deal with Sechin. Read again what Sechin had to say at the time. What he is saying now is that the terms of that agreement need to be opened by the Russian anti-trust watchdog, the Federal Antimonopoly Service (FAS), for a determination of whether the contract is in compliance or in violation of Russian law. That’s a strong hint that the terms on which AAR have relied may be nullified. But such an outcome would increase the flexibility on the Russian side, not only on BP’s side. Any number of combinations or permutations of the two stakes in TNK-BP would become possible – without Fridman and his AAR comrades being in a position to veto them. Of course, if the FAS decides the AAR terms are enforceable under Russian law, that would mean Sechin has decided against BP once more, and Dudley has no flexibility left. If the FAS decides that it cannot rule until and unless the Russian parliament amends the applicable statutes, that would be tantamount to defeat for Dudley. BP would face more months of no cash dividend from TNK-BP.

The only Russian buyer with enough cash to buy into TNK-BP from either side is not Rosneft but Surgutneftegaz (SNG). According to Renaissance Capital’s report on SNG’s financial position, as of December 31 last, its net cash amounted to $26.7 billion. Its market capitalization is almost $40 billion. With negligible debts, its borrowing capacity, especially from Russia’s state banks, is large. If SNG is to be the buy-out vehicle, there remains the unanswered question – who and what will the target be? Imagine if SNG bought out Fridman and his partners for cash, and swapped BP’s stake in a share-swap scheme similar to the one attempted in 2011 by Sechin with Rosneft, with additional cash to equalize for the value differential between Rosneft then and SNG post-deal. That would eliminate both sources of trouble at TNK-BP, and eventually bring it within Sechin’s direct control in a follow-on merger between SNG and Rosneft. Whatever the outcome, and taking into account that too few decisions have been taken to date to make forecasting reliable, the one certainty is that if BP doesn’t exit Russia altogether, its largest single stakeholder is bound to be Russian. In a British doughnut, that’s quite a hole.